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Whose internal audit department is it? The impact of audit committee internal audit dominion on the nature of internal audit activities
Lawrence J. Abbott, University of Memphis
Susan Parker, Santa Clara University
Gary F. Peters, University of Arkansas
ABSTRACT. The Sarbanes-Oxley Act mandates an annual report on a registrant’s internal controls and greater audit committee oversight of the financial reporting process. Recent NYSE listing rules also require an internal audit (IA) department. However, both sets of regulation remain silent as to the audit committee’s interaction with IA. In response, the IIA has recommended that internal audit report directly to the audit committee, rather than to upper management. In this paper, we hypothesize that audit committees with greater functional authority over the internal audit function (vis-à-vis management) will steer IA focus towards the more traditional IA functions of internal control evaluation and EDP auditing.
Based upon survey results from 120 Fortune 1000 Chief Internal Auditors, we find results consistent with our hypothesis. In sum, our evidence suggests the IA function is slowly evolving from the ‘eyes and ears of management’ to the ‘eyes and ears of the audit committee.’
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